Is RSUPPORT (KOSDAQ:131370) Using Too Much Debt?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, RSUPPORT Co., Ltd. (KOSDAQ:131370) does carry debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for RSUPPORT

What Is RSUPPORT's Debt?

As you can see below, RSUPPORT had ₩9.00b of debt, at September 2020, which is about the same as the year before. You can click the chart for greater detail. However, it does have ₩32.9b in cash offsetting this, leading to net cash of ₩23.9b.

How Healthy Is RSUPPORT's Balance Sheet?

We can see from the most recent balance sheet that RSUPPORT had liabilities of ₩18.6b falling due within a year, and liabilities of ₩1.47b due beyond that. Offsetting this, it had ₩32.9b in cash and ₩5.87b in receivables that were due within 12 months. So it can boast ₩18.7b more liquid assets than total liabilities.

This surplus suggests that RSUPPORT has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that RSUPPORT has more cash than debt is arguably a good indication that it can manage its debt safely.

Even more impressive was the fact that RSUPPORT grew its EBIT by 142% over twelve months. That boost will make it even easier to pay down debt going forward. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine RSUPPORT's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. RSUPPORT may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Looking at the most recent three years, RSUPPORT recorded free cash flow of 23% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that RSUPPORT has net cash of ₩23.9b, as well as more liquid assets than liabilities. And we liked the look of last year's 142% year-on-year EBIT growth. So is RSUPPORT's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 1 warning sign for RSUPPORT that you should be aware of.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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